Employment Report

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The May employment report, one of the most anticipated in years, in many respects was not as volatile as most of them are. Non-farm jobs earlier this week were for an increases of 167K, after the ADP report on Wednesday being weaker than what had been expected the estimates were ratcheted lower. Non-farm jobs were up 175K and non-farm private jobs increased to 178K right on what the early forecasts were. March and April jobs revisions subtracted 12K jobs originally reported. The unemployment rate was expected to be unchanged at 7.5%, increased to 7.6% because 420K  people entered the job market but only 315K found jobs. Average hourly earnings in May were unchanged from April. After all of my angst that the data is unpredictable and generally wide of the target, this time the data was about in line with estimates. Even though the data was generally in line, the reaction was still somewhat volatile for 30 minutes. The 10 yr yield ended yesterday at 2.08%, on the report the yield briefly jumped to 2.14% and MBS prices declined; then the 10 fell to 2.05% before stabilizing at 2.11% at 9:00 with 30 yr mortgage prices -16 bp but still held its key support at 103.00 for the 3.5 June FNMA coupon. At 9:30 the DJIA opened +65, NASDAQ +14, S&P +8. The 10 yr at 2.12% +4 bp and 30 yr MBS price -33 bp frm yesterday’s close. What now for the Fed in terms of tapering the QEs? The data really didn’t change the uncertainty. Bill Gross of PIMCO fame said “Today’s report doesn’t say anything about tapering at all,” Gross, manager of the world’s biggest bond fund, said the Federal Reserve is unlikely to reduce its asset purchases after the unemployment rate climbed from a four-year low in May. Gross’s fund suffered the first client withdrawals since 2011 in May, with clients pulling $1.3 billion from the fund, according to estimates from Morningstar Inc. in Chicago. The fund declined 0.6 percent this year, trailing 53 percent of peers, according to data compiled by Bloomberg. Over the past five years, Gross’s fund has advanced 7.6 percent, ahead of 94 percent of rivals. Today’s employment data appears to have resolved nothing in the debate over what the Fed will do. Two former Fed economists, Vincent Reinhart a very reputable voice in the economists’ world and former director of the Fed’s Division of Monetary Affairs and Roberto Perli a former research both are saying Bernanke may want to see four months of job growth of 200K or more before he decides to taper an important clue to the outlook for monetary policy. Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the Federal Open Market Committee this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement. Reinhart, now chief economist at Morgan Stanley wrote in a May 28 note to clients he doesn’t expect the Fed to reach that hurdle until December because the economy is likely to encounter a “soft patch.” Evans last month said he’d like to see monthly employment growth of 200,000 or more for at least six months. Rosengren, in a May 29 speech in Minneapolis, said “significant accommodation remains appropriate at this time.” The data today is being seen as better than expected; it matched the estimates that were floating at the beginning of the week but after the soft ADP data on Wednesday many were revising the forecasts lower. That it was right on from the early estimates is being ignored to see the data as better than markets thought. So far today the key stock indexes are better but not exploding higher. The bond market slightly weaker but also nothing significant so far. Looking at the technical picture, the rate markets remain bearish BUT are still holding key support levels; 2.17% for the 10 yr note and 103.00 for the 3.5 June FNMA coupon. With still very mixed opinions about what the Fed may do, it is important to focus on technicals, the real measurement of what investors and traders are actually doing rather than all the rhetoric and opinions. We want to continue to float until those support levels give way. If they do we expect rates will increase about 10 to 15 bps on the 10 yr and at least 10 more basis points on 30 yr mortgage rates, then we will reassess the next step.